Question

Refer to the bond details in Problem 10-4B.

Required

1. Compute the total bond interest expense over the bonds’ life.
2. Prepare an effective interest amortization table like the one in Exhibit 10B.2 for the bonds’ life.
3. Prepare the journal entries to record the first two interest payments.
4. Use the market rate at issuance to compute the present value of the remaining cash flows for these bonds as of December 31, 2019. Compare your answer with the amount shown on the amortization table as the balance for that date (from part 2) and explain your findings.

Short answer

.

Step-by-step solution

Bond

The bond is the written promise to pay the bond’s par (or face) value and interest at a stated contract rate. It is often issued in the denomination of $1,000

Computation of total bond interest expense

Account repaid ()	$144,000
Par value at maturity	320,000
Total repayment	464,000
Less amount borrowed	(332,988)
Total bond interest expense	$131,012

The total bond interest expense is $131,012.

Effective interest Amortization table

Bonds: $320,000 Par Value, Semi-annual Interest Payments, Two-Year Life, 4.5% Semi-annual Contract Rate, 4% Semi-annual Market Rate
		A	B	C	D	E
	Semi-annual period end	Cash interest paid (4.5% of $320,000)	Bond interest expense (4% of prior E)	Discount amortization (B)-(A)	Unamortized discount Prior (D)-(C)	Carrying value $320,000+(D)
0	01-01-2017				$12,988	$332,988
1	30-06-2017	14,400	13,320	1,080	$11,908	$331,908
2	31-12-2017	14,400	13,276	1,124	$10,784	$330,784
3	30-06-2018	14,400	13,231	1,169	$9,615	$329,615
4	31-12-2018	14,400	13,185	1,215	$8,400	$328,400
5	30-06-2019	14,400	13,136	1,264	$7,136	$327,136
6	31-12-2019	14,400	13,085	1,315	5,821	325,821
7	30-06-2020	14,400	13,033	1,367	4,454	324,454
8	31-12-2020	14,400	12,978	1,422	3,032	323,032
9	30-06-2021	14,400	12,921	1,479	1,553	321,553
10	31-12-2021	14,400	12,862	1,538	15	320,015

Journal entry to record the first two interest payment

	Premium on bonds payable	$1,299
	Cash		$14,400
	Pay semi-annual interest and record amortization.

Dec 31 2017	Bond interest expense	$13,101
	Premium on bonds payable	$1,299
	Cash		$14,400
	Pay semi-annual interest and record amortization.